Late Life Assets and Decommissioning – collaboration not competition

Addleshaw Goddard LLP and Edison Group hold Panel Discussion on UKCS Late Life Assets and Decommissioning

At a Panel Discussion on UKCS Late Life Assets and Decommissioning, held by Addleshaw Goddard LLP and Edison Group on 29 November 2016, the current UKCS investment environment and in particular challenges facing late life assets were discussed by a panel of industry representatives: Mark McAllister (Chairman of The Decommissioning Company), Dave Sinclair (Head of Decommissioning at Maersk Oil) and Simon Lee (Senior Manager in the Oil & Energy team at Deloitte), co-chaired by Anna Nerush (Partner in the Corporate team at Addleshaw Goddard LLP) and Ian McLelland (Global Head of Natural Resources at Edison Group) with participation from Jim Christie (Head of Decommissioning at Oil & Gas Authority).

With an estimated 43% of UKCS oil fields operating at a loss in 2016, many operators of late life assets are facing the difficult question of whether to sell, extend or decommission the asset. Each option is not without its challenges. Many oil companies are facing increased cost saving pressure and investor scrutiny and extension of the asset's operational life is likely to require considerable capital investment and development. Selling and bridging the gap between buyer and seller expectations in the current low oil price market may also prove challenging. Unlike life extension or disposal, decommissioning is not an investment project but a considerable capital expense incurred by the licensees in compliance with their international and domestic obligations to completely remove all offshore installations for reuse, recycling or final disposal on land.

The scope of domestic and international regulations surrounding abandonment and decommissioning of offshore installations has been the subject of much debate over the past year and the overall industry perception is largely that the current regulatory regime is sufficiently broad to allow operators the necessary flexibility. However, while the operators and owners would welcome additional regulatory and fiscal investor incentives, the uncertainty associated with decommissioning is largely attributed to lack of experience of large-scale decommissioning projects, which has led to uncertainty in cost forecasting. The inability to quantify decommissioning liability with a degree of certainty renders late life assets riskier and less attractive to potential investors. With many offshore infrastructures approaching decommissioning, the UKCS basin is entering a new life cycle and the focus is very much on the oil and gas industry to deliver a collaborative and cost efficient solution, overcoming the challenges and capitalizing on the opportunities of large scale decommissioning.

When considering potential solutions for reducing the margin of uncertainty, the key approach is industry collaboration. The Oil & Gas Authority estimates that that by developing expertise in decommissioning and collaborating, operators in the UKCS could reduce the cost of decommissioning by 35%. However, for the oil and gas industry, to fulfil this remit will require a fundamental shift of mind-set by a traditionally competitive industry used to delivering capital-intensive investment projects. The value of a decommissioning project is very different from the value of a capital investment project within the exploration and production phase. A decommissioning project is not driven by schedule and a rush to first oil but by delivering a decommissioning programme in a cost efficient and environmentally safe manner. The execution strategy for a decommissioning project is necessarily different to the strategy for implementing a capital investment project: confidentiality is replaced by collaboration.

Cost-savings can come from experience, firstly through collaboration and lesson-sharing and secondly through the development of new technologies. Economies of scale should be possible if the problem is addressed as a whole, simply because all of the structures on the UKCS will, eventually, need to be decommissioned. Each decommissioning project need not be seen as a unique problem for each owner. While technology will undoubtedly provide significant cost-savings for the UKCS industry, much of it is still in development. Time well invested in negotiating collaboration agreements to share the risks fairly between the different operators will yield potential synergies and is likely to be much quicker than waiting for new technologies.

Sharing information operator-to-operator and operator-to-service provider helps to reduce the trial and error and therefore the cost of a decommissioning project, as seen in regions experienced in decommissioning, such as the Gulf of Mexico, where independent oil and gas investors buy an asset from a major and implement valuable cost-saving initiatives in its later life and decommissioning phases. That kind of experience, and its attendant tax regime, does not yet exist in the UKCS, so it is important that asset owners are prepared to collaborate and share information to garner what experience there is.

While presenting some clear challenges, decommissioning in the UKCS also offers numerous opportunities across the entire value chain. We are already seeing growth in decommissioning services and service providers, which are expected to grow as the UKCS oil and gas industry harnesses its experience and know-how. The need for cost reduction and certainty has led to the development of new technologies, such as single lift solutions for large structures, as well as new products, such as insurance policies addressing specific decommissioning risks, including contractual and liability exposure. There is a real opportunity for the UK to become a center of excellence for decommissioning, delivering cost-savings through collaboration and expertise.